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No Paper Tiger

Paper products giant Kimberly-Clark has a solid quarter in a difficult market.

Despite the high costs of raw materials and a competitive 2% drop in prices, Kimberly-Clark(NYSE:KMB) still managed to have a solid second quarter. Yesterday, the maker of Kleenex, Scott, Pull-Ups, and Huggies posted a 9% rise in net income to $454 million, or $0.90, from $417 million the year before. Revenues ticked up 6.5% to $3.78 billion.

The company beat earnings estimates by a penny while falling short at the top end, reflecting $50 million in pre-tax cost savings as well as lower income taxes. Sales grew, albeit slowly, across all business segments: consumer tissue, personal care, and business to business. Revenues at the three units rose 6%, 4%, and 12%, respectively, driven almost entirely by volume growth and favorable currency translation, as pricing was weaker across the board.

Earlier this year, rising costs of raw materials presented challenges for Kimberly-Clark, as well as for traditional rivals Procter & Gamble(NYSE:PG) and Georgia-Pacific(NYSE:GP), and continued into the second quarter. A competitive 2% drop in prices worsened matters, causing a loss of $80 million for the company. Kimberly-Clark reiterated its plans to combat rising prices by lifting tissue prices in the third quarter.

Despite expenses to overhaul the company's diaper operations -- a soft North American diaper market triggered the closure of a Connecticut facility -- Kimberly-Clark has done a remarkable job of cutting costs. Year to date, more than $95 million has been saved, and the full-year $150 million goal has been bumped up to as much as $200 million. Furthermore, the company has shown restraint with respect to capital spending, slashing expected outlays by $100 million to $150 million.

This all sweetens the firm's already generous cash flows, which are closing in on $2 billion annually. The bulk of that will be used to fund an ambitious $1.4 billion share repurchase agreement. Raw material and energy inflationary pressures notwithstanding, Kimberly-Clark's cost-cutting measures, cash generation, and above-average dividend yield all look good. Still, with a forward P/E of around 18, the stock looks fairly valued for a company with single-digit earnings growth and that operates in a mature industry.